The TJX Companies, Inc. (TJX), Ross Stores, Inc. (ROST): Buy This Discount Retailer

The TJX Companies, Inc. (NYSE:TJX), the owner of the TJ Maxx and Marshalls concepts, is the biggest discount retailer in the United States. Even with its dominant position, I see tremendous opportunity for growth due to smart capital allocation and strategic decisions – far more so than competitor Ross Stores, Inc. (NASDAQ:ROST). While Amazon.com, Inc. (NASDAQ:AMZN) is a danger to many retailers, I do not view it as a significant threat to The TJX Companies, Inc. (NYSE:TJX).

A great first quarter, and more to come

The TJX Companies, Inc. (NYSE:TJX) posted a great first quarter of FY 2014 (which is the first quarter of calendar 2013), with EPS growing by over 10% (from $0.55 to $0.62) and comps by 2% year-over-year. Management is returning value to shareholders, with $1.3 billion to $1.4 billion in share repurchases planned for the remainder of FY 2014, and a recent quarterly dividend hike from $0.115 to $0.145 (the 17^th year in a row that the dividend has increased). With a payout ratio below 25%, there is plenty of room for the dividend to grow even if earnings don’t.

But I expect earnings to grow. On the first-quarter 2014 earnings call, CEO Carol Meyrowitz noted that:  “We see the potential to grow our store base by at least 50% with our current portfolio in our current markets alone.” Interestingly, with Europe a black hole for many other American companies (see:Ford Motor Company (NYSE:F)), The TJX Companies, Inc. (NYSE:TJX) views the continent as a big opportunity for growth. Management believes the discount-retail model will continue to perform in Europe and, given the economic malaise, I think they’re right. When people have less to spend, they’re looking for a bargain – and The TJX Companies, Inc. (NYSE:TJX) is the biggest discount retailer in Europe.

Different from other retailers

A lot of retailers are playing defense against Amazon.com, Inc. (NASDAQ:AMZN), which grew revenue an astonishing 318% between 2008 and 2012 by promoting “showrooming,” where customers test-drive products at traditional brick-and-mortar stores and then buy them cheaper online. While Amazon.com, Inc. (NASDAQ:AMZN) has been a major disruptive force in the retail market, I don’t see it as a threat to TJX for two reasons, one immediate and one long-term.

The immediate reason for my lack of concern is that there is limited product crossover – only 17% of The TJX Companies, Inc. (NYSE:TJX) products can also be found on Amazon.com, Inc. (NASDAQ:AMZN) compared to 46% of the average retailer’s inventory. Long term, Amazon.com, Inc. (NASDAQ:AMZN) has to remain profitable to continue to remain in investors’ good graces. Amazon.com, Inc. (NASDAQ:AMZN)’s EPS went negative at the end of 2012, and the first quarter of 2013 showed a substantial decline in earnings from the first quarter of 2012 ($0.18 versus $0.28). Amazon will have to raise prices at some point – volume alone will not make up the deficit.